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The problem with Trudeau’s high road

Paul Wells: The Liberals can’t seem to resist claiming moral superiority. But on their tax reforms, it’s not totally clear what side they’re on.

Liberal Members of Parliament give Minister of Finance Bill Morneau a standing ovation as he delivers the federal budget in the House of Commons on Parliament Hill in Ottawa, Wednesday March 22, 2017. (Sean Kilpatrick/CP)

It’s fun these days watching Pierre Poilievre go after Bill Morneau on the government’s proposed tax changes. Poilievre is the Conservative finance critic, and Morneau is the finance minister, and typically their exchanges go this way.

Poilievre opens by asking why Morneau is hellbent on unleashing a plague of locusts on Canadian pizza parlour owners. Morneau says he’s not in fact doing that, he’s just trying to make the system more fair. Poilievre says, well, if you’re so obsessed with fairness, why aren’t you touching the cozy tax rules that make life so cushy for Morneau Shepell, your own company, or inherited trusts like Justin Trudeau’s? Suddenly Morneau isn’t sure what to say next.

Last Thursday, Poilievre began by citing a Canadian Federation of Independent Business survey in which lots of respondents said “this new Liberal tax increase will make it harder to create jobs and grow. That means thousands of young people and new Canadians will not get that first job, and many more might be laid off.”

“Scare tactics,” Morneau replied. “We know that the current system, a system that they were comfortable with, actually gives advantages to the richest over the middle class.”

Poilievre says, what do you mean, richest? “Our millionaire Prime Minister confirmed these tax changes will not affect what he called his ‘family fortune.’ The Minister of Finance made sure his billion-dollar family business, Morneau Shepell is sheltered from any of the changes.”

Morneau was incensed. “Mr. Speaker, the member opposite is deliberately misleading Canadians.” You’re not allowed to say that, so the Speaker made him retract. Which he did, and then the minister was left with more or less the same answer he’s had all along. “We know that our system right now encourages the wealthiest Canadians to set up a private corporation so they can pay a lower tax rate than middle-class Canadians. We know that the party opposite is perfectly comfortable with wealthier Canadians paying a lower tax rate than middle-class Canadians. What we are working toward is to make sure we look at those advantages, and listen to Canadians to make sure we are taking measures that will ensure that our system is fair.”

This is not a satisfying answer. If the government’s goal is fairness, then why can’t Morneau discuss the tax treatment of companies as big as his own? So the emerging dynamic is: Conservative asks question, Morneau argues fairness, Conservative points out something else in the world that obviously isn’t fair, Morneau doesn’t have an answer.

This is because the nation’s finances are full of things that aren’t fair. And while it’s clear the Liberals hope to use their tax changes as a sort of parable for the standing-up-for-ordinary-workers part of their broader discourse—a centre-left populism that Trudeau believes other like-minded leaders, such as Hillary Clinton, forgot to defend, to their peril—the specific tax changes in question didn’t appear on the Liberals’ radar because the current arrangements are unfair.

No, they first drew the attention of Liberals because they’d drawn the attention of the Finance department, because the use of incorporation to avoid hefty tax bills was increasing rapidly. A few years ago, incorporation for tax purposes was still a rather exotic procedure for many Canadians who could benefit. But the faster word spread about the formidable tax advantages, the more people made use of incorporation to cut their tax bills.

Apparently a lot of people who’ve incorporated are sensitive about having this gap between personal and small-business tax rates called a “loophole,” but what the heck: It’s a loophole, in the sense that it was never designed as a goal of public policy.

There was never a meeting, under Paul Martin or Stephen Harper or anywhere else, where enlightened policy-makers sat around saying, “We need a way to encourage feisty innovators to pull themselves up by their bootstraps. If we can just get the gap between personal and small-business tax rates wide enough…” No, it just happened by accident.

The large and accelerating rates of incorporation happened because of the weird interaction of two different populist instincts: (1) Even tax-cutting governments were reluctant to reduce personal income taxes on the top tier of income-earners, for fear of being accused of delivering “a tax cut to the richest Canadians;” (2) Just about every government from Jean Chrétien’s onward was eager to cut small-business tax rates, because this seemed to be a handy spur to the plucky spirit of the theoretically job-creating mom-and-pop entrepreneurial class.

So, personal income tax rates stay high, while small-business taxes drop steadily. Soon it makes sense for anyone who can do it to announce that they are no longer an income-earner, they are… a job-creating centre of plucky innovation. The tax advantage is obvious. I’ve been advised to do it forever, by well-meaning friends: Why do you persist as a Rogers salaryman when you could contract your services as the CEO of Inkless Words Inc.? The funny thing is, nobody ever argued it would make me more entrepreneurial and innovative. The argument began and ended with tax advantage. And it probably doesn’t flatter my financial acuity to admit I never made the change.

It’s not entirely clear to me where fairness enters into any of this. Or rather, once fairness gets into it, I have no idea how to get it out. If the stated goal of tax reform is to make it fairer, then of course the taxation of Bill Morneau’s company is a reasonable question, and of course it’s simply weird when Morneau refuses, for days on end, to answer it.

It would have been interesting to see whether the Liberals would have fared better if they’d kept fairness out of it. Their remedy on small-business taxation is similar to Jim Flaherty’s remedy to income-trust taxation early in the Conservatives’ decade in office: a previously innocuous accounting practice was exploding in popularity because the tax advantage was too great to ignore. The loss in revenue was becoming a problem. Technical problem, technical solution. (The Liberals have the added advantage of having campaigned in an election for the changes they now propose, whereas the Conservatives had campaigned against the changes Flaherty introduced. But the situations are otherwise comparable.)

The problem is, it’s really hard for Liberals to resist the temptation to claim moral superiority. “We need the revenue” is less appealing, because less flattering, than “We’re making the system fairer for all Canadians.” Self-flattery is a weakness that stalks us all, but your average Trudeau Liberal is perhaps unusually susceptible. Justin Trudeau spent Monday morning listening with a straight face while Jack Ma, the CEO of the jillion-dollar Chinese e-commerce firm Alibaba, talked about the importance of “EQ, IQ and LQ” in running a successful business. LQ, in this formula, is “Love Quotient.” A steady diet of this sort of thing may dull one’s ability to spot an argument that will risk provoking listeners’ gag reflex.

One more thing. The other problem with Trudeau and Morneau styling themselves as champions of the working class is that they may forget that they, and a large fraction of the people they know, are fabulously wealthy. And it turns out a lot of Liberals have spent the last few years incorporating themselves to take advantage of the gap between personal income tax and small-business tax rates. That’s all the more true for Liberals who are too old, or too entrenched in their family lives, to move back to Ottawa to become political staffers again. I wonder whether Morneau is surprised by the number of Liberal activists, in Toronto and Vancouver and Montreal ridings, who feel targeted by the proposed changes and by the fairness rhetoric around them.

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